The News & What it Means – Slowing Farmland Values Gains Have Implications for Equity

By John DePutter & Dave Milne – May
1, 2019

The news:

“Canadian farmland values are still
rising, although this past year’s increase was the smallest since 2010.”

– Syngenta website article, Apr. 29, 2019

What it means:

It’s time for producers to monitor their
financial well-being more closely.

We
all knew this shoe would eventually drop. After posting double-digit gains
throughout the 2011-15 period in the wake of sharply higher crop and livestock
prices, Canadian farmland values were bound to cool as commodity prices came
back to earth (see graph below). And while it is true land values were still
trending higher in 2018, the 6.6% nationwide average gain observed by Farm
Credit Canada represents the smallest increase since 2010.

Further,
the report notes a great deal of variability across the country, with land
values in some specific regions continuing to show big year-over-year gains, while
others are flat to lower.

The
moderating gains – or declines, in some cases – should be concerning to some
farmers, given how important farmland is in supporting overall farm equity.

Land values key to farm equity

Earlier
this year, Statistics Canada reported Canadian farm equity as of Dec. 31, 2017
(the latest year for which data is available) at $503.9 billion, up 6.4% or
$30.2 billion from a year earlier. But perhaps more interesting was the fact that
real estate accounted for roughly three-quarters of total asset value in that
year. In comparison, back in the early 2000s, farmland values only accounted
for about half of the total farm asset value.

So,
it’s easy to see that as farmland values go, so too does farm equity. Additional
proof can be seen in the strong farm equity gains of 12.8% and 9.2% in 2013 and
2014, respectively – years in which FCC reported similarly strong advances in farmland
values of 22.1% and 14.3%.

And
as farm equity goes, so too does the ability of a farm or any other business to
remain financially secure enough to ride out the inevitable phases of low
commodity prices that strike the ag scene every now and then.

Rising
equity also helps you obtain the necessary bank financing to upgrade your equipment
and vehicles, make expansion plans and so forth. Lots of farmers are happily
adding up the value of their assets and subtracting their liabilities and
finding they’re richer than they ever dreamed. Indeed, according to Investopedia, equity is one of the most
common financial metrics to assess one’s financial health.

Cracks beginning to appear?

In
New Brunswick, things are already starting to go backward. For 2017, StatsCan
reported that farm equity in that province declined by 1.2%, the only province
where the growth in liability value outpaced a slight gain in farm asset value.
Meanwhile, the FCC report showed that New Brunswick farmland values were up
only 1.8% in 2018, suggesting the potential for equity to erode further.

Staying
in the Maritimes, Nova Scotia farmland values were reported down almost 5% in
2018 (following a 9.5% increase in 2017), the result of declining wild
blueberry prices, reduced dairy quota volumes and an overall softening of demand
for vacant cultivated land.

Those
are relatively small farming areas but the situation in New Brunswick and Nova
Scotia may be the tip of the spear. In the wake of weakening farm income, subdued
commodity prices and rising input costs, farmland values in other provinces may
eventually show somewhat similar tendencies.

If
that happens, farm equity, which is based largely on land values, would
decline.

It’s something the DePutter team is
monitoring closely.

To keep up to date on macro-issues like
farm income trends and other ag-related news, keep in touch with our daily morning report services.